City of Farmington Hills Employees Retirement System and Post-Retirement Healthcare Finance Fund

Transcription

1 Employees Retirement System and Post-Retirement Healthcare Finance Fund Financial Reports with Supplemental Information

2 Employees Retirement System and Post-Retirement Healthcare Finance Fund Contents Letter of Transmittal i-iii Employees Retirement System Report Letter 1-2 Management s Discussion and Analysis 3-5 Basic Financial Statements Statement of Fiduciary Net Position 6 Statement of Changes in Fiduciary Net Position 7 Notes to Financial Statements 8-20 Required Supplemental Information 21 Schedule of Investment Returns 22 Schedule of Changes in the City s Net Pension Liability and Related Ratios 23 Schedule of Employers Contributions 24 Post-Retirement Healthcare Finance Fund Report Letter Management s Discussion and Analysis Financial Statements Statement of Plan Net Position 31 Statement of Changes in Plan Net Position 32 Notes to Financial Statements Required Supplemental Information 43 Schedule of Investment Returns 44 Schedule of Changes in the City s Net OPEB Liability and Related Ratios 45 Schedule of Employers Contributions 46

3 EMPLOYEES RETIREMENT SYSTEM November 9, 2017 Board of Trustees of the City of Farmington Hills Employees Retirement System I am pleased to submit the City of Farmington Hills Employees Retirement System and Post-Retirement Healthcare Finance Fund Annual Financial Report for the fiscal year ended. This report was prepared by the City of Farmington Hills Finance Department in conformance with regulations and standards set forth by City Ordinance, the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants and its Committee on Governmental Accounting and Auditing, Generally Accepted Accounting Principles (GAAP), and the Treasurer of the State of Michigan. This report consists of management representations concerning the finances of the City of Farmington Hills Employees Retirement System. Therefore, responsibility for the accuracy, completeness, reliability, and fairness of the financial data herein, including all disclosures, rests with the administration and management of the City of Farmington Hills Employees Retirement System. I believe the data presented are accurate in all material aspects, that they are presented in a manner designed to fairly set forth the financial position of the Retirement System, and that all disclosures necessary to enable the reader to gain the maximum understanding of the Retirement System s financial affairs have been included. The statements have been audited in accordance with generally accepted auditing standards by Plante & Moran, PLLC, a certified public accounting firm licensed by the State of Michigan. Since the report consists of management s representations concerning the finances of the City of Farmington Hills Employees Retirement System, a comprehensive internal control framework that is designed both to protect the Retirement System s assets from loss, theft, or misuse and to compile sufficient reliable information for preparation of the City of Farmington Hills Employees Retirement System s financial statements in conformity with GAAP has been established. However, due to the fact that the internal control systems should be cost effective, the Retirement System s comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. Plante & Moran, PLLC has audited the City of Farmington Hills Employees Retirement System s financial statements to provide reasonable assurance that the Retirement System s financial statements for the fiscal year ended are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures contained in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The independent auditors concluded, based upon the audit, that there was a reasonable basis for rendering an unmodified opinion that the City of Farmington Hills Employees Retirement System s financial statements for the fiscal year ended are fairly presented in conformity with GAAP. The independent auditor s report is presented as the first component of the financial section of the report. i

4 Accounting principles generally accepted in the United States of America require that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of a management s discussion and analysis (MD&A). This letter of transmittal is designed to complement the MD&As for both the Employees Retirement System and Post-Retirement Healthcare Finance Fund and should be read in conjunction with them. The City of Farmington Hills Employees Retirement System and Post-Retirement Healthcare Finance Fund MD&As can be found immediately following each report of the independent auditor. Profile of the Retirement System The City of Farmington Hills Employees Retirement System was established on January 1, 1966 for the purpose of providing retirement income, in the form of a defined benefit, retiree health care to qualifying employees and former employees, and survivor income to their qualifying beneficiaries. The administration, management, and responsibility for the proper operation of the Retirement System and for interpreting and making effective the provisions of the retirement ordinance are vested in the Retirement Board. The Retirement Board is comprised of seven members: two representing the public safety departments, two representing the general, teamsters, AFSCME, court, and dispatch members, two representing the residents of the City, and the finance director/treasurer (who serves as the Retirement System s administrator). The board selects its investment consultant, attorney, actuary, auditor, and the custodian. Accounting Changes In June 2015, the GASB issued two new standards addressing accounting and financial reporting for postemployment benefits other than pensions (OPEB, which primarily refers to retiree health care). GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, addresses reporting by OPEB plans whereas GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, addresses accounting and reporting by the employer governments that provide OPEB benefits to their employees. Along with the currently required statement of fiduciary net position and statement of changes in fiduciary net position, OPEB plans will now be required to include in the financial statements more extensive footnote disclosures and required supplemental information related to the measurement of OPEB liabilities for which assets have been accumulated. In addition, the City will, after adoption of GASB 75, recognize on the face of the government-wide financial statements its net OPEB liability. GASB 74 is effective for FY and GASB 75 is effective for FY ii

5 Acknowledgements The preparation of this report would not have been possible without the efficient and dedicated services from many employees of the finance department, in particular the hard work of Susan Hardy, pension accountant and Shu-Fen Lin, controller. The independent auditing firm of Plante & Moran, PLLC provided assistance for proper presentation in the form of counsel, suggestions, and direct input. Credit also must be given to the other board of trustees for their support in maintaining the highest standards of professionalism in the management of the City of Farmington Hills Employees Retirement System s finances. Respectfully submitted, Steve Barr, Administrator City of Farmington Hills Employees Retirement System iii

6 Employees' Retirement System Financial Report with Supplemental Information

7 Independent Auditor's Report To the Retirement System Board of Trustees City of Farmington Hills Employees' Retirement System City of Farmington Hills, Michigan We have audited the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the City of Farmington Hills, Michigan (the "City") as of and for the year ended, which collectively comprise the City's basic financial statements, and have issued our report thereon dated November 9, 2017, which contained unmodified opinions on the financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information. Our audit was performed for the purpose of forming an opinion on the financial statements as a whole. We have not performed any procedures with respect to the audited financial statements subsequent to November 9, In Relation To Opinion on Accompanying Financial Statements The accompanying financial statements of the City of Farmington Hills Employees' Retirement System are presented for the purpose of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. Emphasis of Matter We draw attention to Note 1, which explains that these financial statements present only the City of Farmington Hills Employees' Retirement System and do not purport to, and do not, present fairly the financial position of the City of Farmington Hills, Michigan as of, the changes in its financial position, and the changes in its cash flows, where applicable, for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. 1

8 To the Retirement System Board of Trustees City of Farmington Hills Employees' Retirement System Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and retirement system schedules of investment returns, changes in the employers' net pension liability and related ratios, and employers' contributions, as identified in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplemental information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. The letter of transmittal, as identified in the table of contents, is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. November 9,

9 Employees Retirement System Management s Discussion and Analysis The City of Farmington Hills Employees Retirement System s (the Plan ) 2017 annual report is presented in conformity with the requirements of GASB Statement No. 34. This annual report consists of a discussion and analysis of the Plan s financial performance. It also provides an overview of the Plan s financial activities for the fiscal year ended. Please read this report in conjunction with the Plan s financial statements. Financial Highlights The Plan s total net position increased by $11,639,143, or approximately 8 percent, for the fiscal year ended. This is due primarily to the net investment income of 12.2 percent on beginning net position. The assets of the Plan are held in trust to meet future benefit obligations. The Plan s benefits are funded by contributions from the City of Farmington Hills, Michigan and active members, as well as by the investment income earned on the Plan s assets. From the schedule of changes in the employers net pension liability and related ratios found in the required supplemental information (RSI) section of this report, the Plan s net position as a percentage of the total pension liability was percent as of June 30, 2016 and percent as of, based on the GASB Statement No. 67 report provided by the City s actuary. Total employer and employee contributions were $5.6 million for the years ended June 30, 2016 and The net investment income was approximately $16.9 million. This investment income is attributable to strong financial market performance in fiscal year Total deductions from net position increased by approximately $0.7 million, or 7 percent, from approximately $10.1 million for the year ended June 30, 2016 to approximately $10.8 million for the year ended. The increase results primarily from increased pension payments during fiscal year

10 Employees Retirement System Management s Discussion and Analysis (Continued) Using this Annual Report This annual report consists of four parts: (1) the independent auditor s report (the preceding section), (2) the management s discussion and analysis (this section), (3) the basic financial statements, and (4) required supplemental information. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The financial statements are followed by a section of required supplemental information that further explains and supports the information in the financial statements. Condensed Financial Information The table below shows, in a condensed format, the net position as of and 2016: Assets Cash $ 7,464,008 $ 7,305,270 Investments 142,410, ,461,506 Other 87, ,340 Total assets 149,961, ,116,116 Liabilities Accounts payable 147, ,954 Due to primary government 20,789 34,355 Due to other funds 214,000 - Total liabilities 382, ,309 Net Position Held in Trust for Benefits $ 149,579,950 $ 137,940,807 4

11 Employees Retirement System Management s Discussion and Analysis (Continued) The following table shows the changes in net position during the year ended as compared to the year ended June 30, 2016: Additions Contributions - Employee $ 914,378 $ 907,655 Contributions - Employer 4,710,485 4,710,931 Investment gain (loss) 16,879,281 (2,816,053) Net additions 22,504,144 2,802,533 Deductions Pension payments 10,826,626 10,124,415 Contributions returned to employees 38,375 23,727 Total deductions 10,865,001 10,148,142 Net Increase (Decrease) in Net Position $ 11,639,143 $ (7,345,609) Overall Fund Structure and Objectives Active members of the City of Farmington Hills Employees Retirement System earn service credit that entitles them to receive benefits in the future. The objective of the Plan is to establish and receive contributions that will accumulate assets during each member s years of employment that, along with investment income, will be sufficient to pay promised benefits after retirement. There were 14 new retirees in FY , 12 of whom took annuity withdrawals. Investment Objectives and Policy Guidelines The retirement board of trustees has established policies and guidelines for the prudent investment and management of plan assets. The objectives are to provide for long-range liability and benefit needs of the Plan, giving consideration to or providing for the following: Diversification of investments to take advantage of opportunities in the capital markets Protecting principal from both market value and inflationary erosion Moderate risk taking Liquidity and current return on investments relative to anticipated cash flow requirements Projected return on investments relative to the funding objectives of the Plan Regular monitoring and evaluation of performance 5

12 Employees' Retirement System Statement of Fiduciary Net Position Assets Cash and cash equivalents $ 7,464,008 Investments (Note 3): Common stock 54,666,277 Pooled funds 87,743,776 Accrued interest, dividends, and other receivables 87,918 Total assets 149,961,979 Liabilities Accounts payable 147,240 Due to primary government 20,789 Due to Post-Retirement Healthcare Finance Fund 214,000 Total liabilities 382,029 Net Position Restricted for Pensions $ 149,579,950 The Notes to Financial Statements are an Integral Part of this Statement. 6

13 Employees' Retirement System Statement of Changes in Fiduciary Net Position Year Ended Additions Investment income: Interest and dividends $ 2,256,168 Net change in fair value of investments 15,825,929 Investment expense (1,202,816) Net investment income 16,879,281 Contributions: Employer 4,710,485 Employee 914,378 Total contributions 5,624,863 Total additions - Net 22,504,144 Deductions Pension payments 10,826,626 Contributions returned to employees 38,375 Total deductions 10,865,001 Net Increase in Net Position Held in Trust 11,639,143 Net Position Restricted for Pensions - Beginning of year 137,940,807 Net Position Restricted for Pensions - End of year $ 149,579,950 The Notes to Financial Statements are an Integral Part of this Statement. 7

14 Employees' Retirement System Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies The following is a summary of the significant accounting policies used by the City of Farmington Hills Employees' Retirement System: Reporting Entity The City of Farmington Hills Employees Retirement System (the Plan ) is a singleemployer, defined benefit pension plan that is administered by the City of Farmington Hills Employees Retirement System Board of Trustees. The Plan also has a defined contribution component which provides an option for those eligible to receive annuity withdrawals or a lump-sum payment of their cumulative employee contributions, plus earnings thereon, upon retirement. Plan benefits accrue to all general, court, police, and fire employees who qualify under the Plan. The Plan s financial statements are also included in the Comprehensive Annual Financial Report of the City of Farmington Hills, Michigan (the City ) as a pension and other employee benefit trust fund. Accounting and Reporting Principles The Plan follows accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. Accounting and financial reporting pronouncements are promulgated by the Governmental Accounting Standards Board (GASB). Basis of Accounting The Plan uses the economic resources measurement focus and the full accrual basis of accounting. Revenue is recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Plan member contributions are recognized in the period in which the contributions are due. Employer contributions to the Plan are recognized when due pursuant to legal requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plan. Administrative costs are financed with plan net position. Specific Balances and Transactions Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with a maturity of three months or less when acquired. 8

15 Employees' Retirement System Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies (Continued) Investments - Investments are reported at fair value or estimated fair value. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Investments that do not have an established market value are reported at estimated fair value as determined by the Plan's management. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Note 2 - Pension Plan Description Plan Administration - The City of Farmington Hills Employees' Retirement System Pension Board administers the City of Farmington Hills Pension Plan - a cost-sharing multiple-employer defined benefit pension plan that provides retirement, disability, and death benefits for all eligible general, court, police, and fire plan members and their beneficiaries. Benefit terms have been established by employer policy and contractual agreements authorized by city ordinance, which may be amended by City Council actions. Management of the Plan is vested in the pension board, which consists of seven members - four elected by plan members, two appointed by City Council, and the City's finance director/treasurer, who serves as an ex-officio member. Plan Membership - At June 30, 2016, pension plan membership consisted of the following: Inactive plan members or beneficiaries currently receiving benefits 293 Inactive plan members entitled to but not yet receiving benefits 14 Active plan members 277 Total plan members 584 9

16 Employees' Retirement System Notes to Financial Statements Note 2 - Pension Plan Description (Continued) The general group was closed to new hires as follows: - Nonunion and AFSCME Union - Effective July 1, Dispatcher Union - Effective January 1, Teamsters Union - Effective January 1, District Court Employees - Effective September 1, 2015 The general group consists of union employees from AFSCME and teamsters, nonunion employees, court employees, executive employees, and dispatch employees. The general group does not include firefighters, police officers, and police command employees. Benefits Provided - The Plan provides retirement, disability, and death benefits to eligible plan members. Retirement benefits are calculated by multiplying the plan member's final average compensation (FAC) times the member's years of services times the multiplier applicable to the member's employee group. FAC is final average compensation consisting of the three highest consecutive years out of the last 10 years. FAC includes longevity on base pay for all employees plus lump-sum holiday pay for police, fire, and dispatch members. The multipliers per employee group are as follows: General - AFSCME employees are eligible to retire if the sum of the plan member's age and years of service equals 80 (minimum age 55) or at the age of 60 with eight years of service. The multiplier for this group is 2.8 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 75 percent. General - Nonunion, court, and teamsters employees are eligible to retire if the sum of the plan member's age and years of service equals 80 (minimum age 55) or at the age of 60 with eight years of service. The multiplier for this group is 2.8 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 80 percent. General - Executive employees are eligible to retire if the sum of the plan member's age and years of service equals 80 (minimum age 55) or at the age of 60 with eight years of service. The multiplier for this group is 3.0 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 80 percent. 10

17 Employees' Retirement System Notes to Financial Statements Note 2 - Pension Plan Description (Continued) General - Dispatch employees are eligible to retire if the sum of the plan member's age and years of service equals 80 (minimum age 55) or at the age of 60 with eight years of service. The multiplier for this group is 2.65 percent up to 25 years of service (until age 67) or percent up to 25 years of service (at age 67) and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 70 percent. Firefighters hired prior to July 1, 2008 are eligible to retire with 25 years of service, regardless of age. The multiplier for this group is 2.8 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 75 percent. Firefighters hired subsequent to July 1, 2008 are eligible to retire at age 50, with 25 years of service. The multiplier for this group is 2.25 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 60 percent. Police command employees are eligible to retire at the age of 50 with 25 years of service, or 30 years of service regardless of age with a minimum of 25 years as a sworn police officer. The multiplier for this group is 3.0 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 80 percent. Police officers hired prior to January 1, 2008 are eligible to retire with 25 years of service, regardless of age. The multiplier for this group is 2.8 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 75 percent. Police officers, hired subsequent to January 1, 2008, are eligible to retire at age 50 with 25 years of service. The multiplier for this group is 2.25 percent up to 25 years of service and 1.0 percent for each year over 25 years of service, with a maximum multiplier of 60 percent. An early retirement benefit is available and actuarially reduced from normal retirement age as follows: - General employee - Age 57 with eight years of service - Patrol/Fire employee - Age 50 with 20 years of service - Police command employee - Age 50 with 15 years of service or under age 50 with 25 years of service as a sworn police officer Plan members are eligible for deferred (vested) retirement benefits if a general employee has eight or more years of service (benefit begins at age 60) or a police/fire employee has 15 or more years of service (benefit begins at age 55). In addition to the normal, early, and deferred retirement provisions, the Plan provides for duty disability benefits to qualifying members. 11

18 Employees' Retirement System Notes to Financial Statements Note 2 - Pension Plan Description (Continued) A pension shall be paid for life to a surviving spouse of an employee who dies in service provided the member attained age 57 and has eight years of service or the member has 10 or more years of credited service regardless of age and died while an employee of the City. Prior to retirement, but not thereafter, a member may elect to receive a retirement benefit by one of the following three methods: 1. Straight Life Retirement Benefits This allowance is a benefit payable to the member throughout his or her life. This is a nonsurvivor benefit and terminates upon the death of the member. 2. Survivor Allowance Options Under three available options, a retiree receives a reduced straight life benefit, payable for life. Upon death, the reduced pension benefit will continue to be paid throughout the beneficiary's life at the percentage option selected. The reduction of straight life benefit is actuarially determined based on the ages of the member and his or her beneficiary at the time of retirement and the percentage option of primary benefit chosen. A greater reduction of straight life benefit will be made to provide 100 percent of the primary pension benefit rather than 75 or 50 percent. The survivor allowance options are: Option A percent of primary pension benefit Option B - 75 percent of primary pension benefit Option C - 50 percent of primary pension benefit Should the named survivor beneficiary die before the retired member, the retired member's pension shall be recomputed (pop-up) to a straight life pension. 3. Annuity Option All city and court employees are eligible for the annuity option. 12

19 Employees' Retirement System Notes to Financial Statements Note 2 - Pension Plan Description (Continued) Contributions - Article 9, Section 24 of the State of Michigan constitution requires that financial benefits arising on account of employee service rendered in each year be funded during that year. Accordingly, the pension board retains an independent actuary to determine the annual contribution. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by plan members during the year, with an additional amount to finance any unfunded accrued liability. Contribution requirements of plan members are established and may be amended by the pension board in accordance with the city ordinance, union contracts, and plan provisions. For the year ended, the average active member contribution rate was 4.5 percent of annual pay. The City's average contribution was 22.4 percent of annual payroll for police members and percent of annual payroll for fire members. For general and court members, the City's contribution was $1,782,993 and $223,426, respectively. Note 3 - Investments The pension fund is authorized by Michigan Public Act 314 of 1965, as amended, to invest in certain reverse repurchase agreements, stocks, diversified investment companies, annuity investment contracts, real estate leased to public entities, mortgages, real estate (if the trust fund's assets exceed $250 million), debt or equity of certain small businesses, certain state and local government obligations, and certain other specified investment vehicles. The Plan has designated one bank for the deposit of its funds. The investment policy adopted by the board in accordance with Public Act 196 of 1997 has authorized investment in all investments permissible under Michigan Public Act 314 of 1965, as amended, as listed above. The Plan's deposits and investment policies are in accordance with statutory authority. The Plan's cash and investments are subject to several types of risk, which are examined in more detail below: Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in the event of a bank failure, the Plan's deposits may not be returned to it. The Plan s investment policy strives to minimize custodial credit risk by prequalifying the financial institutions, broker/dealers, and intermediaries with which the Plan does business. At year end, the Plan had $7,214,008 of bank deposits (certificates of deposit and checking and savings accounts) that were uninsured and uncollateralized. The Plan believes that due to the dollar amounts of cash deposits and the limits of FDIC insurance, it is impractical to insure all deposits. As a result, the Plan evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. 13

20 Employees' Retirement System Notes to Financial Statements Note 3 - Investments (Continued) Concentration of Credit Risk - The Plan is authorized by the State s Pension Investment Act to invest in common stocks, real estate, and various other investment vehicles, subject to certain limitations. As of year end, the Plan had multiple investments, which consisted mostly of pooled investments that exceeded 5.00 percent of the total portfolio. The Plan had 5.31 percent invested in Entrust Diversified Fund, percent invested in Loomis Core Plus, 5.61 percent in Vanguard FTSE Developed Markets Fund, 6.20 percent in Pinehurst Institutional LTD, and 6.81 percent in Edgewood Growth Institutional Fund. Risks and Uncertainties - The City invests in various securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statement of fiduciary net position. Note 4 - Fair Value Measurements The Plan categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. Investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient are not classified in the fair value hierarchy below. In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Plan s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset. 14

21 Employees' Retirement System Notes to Financial Statements Note 4 - Fair Value Measurements (Continued) The Plan has the following recurring fair value measurements as of : Assets Measured at Fair Value on a Recurring Basis Balance at Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Measurement Using Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Debt securities - Mutual funds - Fixed income $ 9,075,011 $ 9,075,011 $ - $ - Equity securities: Common stock 41,194,083 41,194, Mutual funds - Equity 21,651,424 21,651, ADRs and U.S.-held foreign stock 13,472,194-13,472,194 - Total equity securities 76,317,701 62,845,507 13,472,194 - Private equity funds 15,672, ,672,080 Total investments by fair value level 101,064,792 $ 71,920,518 $ 13,472,194 $ 15,672,080 Investments measured at net asset value (NAV) Pooled equity funds 41,345,261 Total investments measured at fair value $ 142,410,053 Debt and equity securities classified in Level 1 are valued using prices quoted in active markets for those securities. The fair value of ADRs at was determined primarily based on Level 2 inputs. The City estimates the fair value of these investments using other inputs such as the underlying security "best" price and exchange rate for underlying security's currency against the U.S. dollar. The fair value of private equity funds at was determined primarily based on Level 3 inputs. The City estimates the fair value of these investments using the fund's fair value which would be defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The private equity funds class includes several private equity funds that invest in infrastructure, energy, shipping, real estate, and corporate debt securities. Total unfunded commitments on the private equity funds are $7,303,

22 Employees' Retirement System Notes to Financial Statements Note 4 - Fair Value Measurements (Continued) The valuation method for investments measured at net asset value (NAV) per share (or its equivalent) is presented on the following table. Investments in Entities that Calculate Net Asset Value per Share The Plan holds shares or interests in investment companies whereby the fair values of the investments are measured on a recurring basis using net asset value per share (or its equivalent) of the investment companies as a practical expedient. At, the fair value, unfunded commitments, and redemption rules of those investments are as follows: Fair Value Unfunded Commitments Redemption Frequency, if Eligible Redemption Notice Period Pooled equity funds $ 41,345,261 $ 905,080 None N/A The pooled equity funds includes funds that invest in equity long/short hedge fund class, event-driven hedge fund class, global opportunities hedge fund class, and multistrategy hedge funds class. The fair values of the investments in these classes have been estimated using the net asset value per share of the investments. Note 5 - Pension Plan Investments - Policy and Rate of Return Investment Policy - The pension plan s policy in regard to the allocation of invested assets is established and may be amended by the pension board by a majority vote of its members. It is the policy of the pension board to pursue an investment strategy that is in compliance with Michigan Public Act 347 of 2012 and manages risk through the prudent diversification of the portfolio across a broad selection of distinct asset classes. The pension plan s investment policy discourages the use of cash equivalents, except for liquidity purposes, and aims to refrain from dramatically shifting asset class allocations over short time spans. The following was the pension board s adopted asset allocation policy as of : Asset Class Target Allocation (%) Global equity % Global fixed income % Hedge funds % Private equity 5.00 % Real estate 7.00 % Infrastructure 7.00 % Gold 5.00 % Cash or cash equivalents 2.00 % 16

23 Employees' Retirement System Notes to Financial Statements Note 5 - Pension Plan Investments - Policy and Rate of Return (Continued) Rate of Return - For the year ended, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense, was percent. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested. Note 6 - Pension Plan Reserves In accordance with city ordinance, the following reserves are required to be set aside within the pension plan: Retiree reserve - The retiree reserve is held in the retirement reserve fund and is to be computed annually by the actuary as the present value of estimated benefit payments for all current retirees. Actuarially computed unfunded liabilities are to be covered by a transfer from the employer reserve. The amounts reserved may be used solely to pay monthly retiree benefit payments. Employee reserve - The employee reserve is held in the member's deposit fund and is credited as employee contributions are received throughout the year; the Plan maintains a record of the amount contributed by each employee and credits interest annually at a rate of 5 percent. For any employee who terminates before vesting in the pension plan, his or her balance is returned to him or her; for those who stay until retirement, the balance is transferred into the retiree reserve. Employer reserve - The employer reserve is held in the pension reserve fund and is used to account for the residual net position balance in the pension plan after funding the retiree reserve. The balances of the reserve accounts at are as follows: Required Reserve Amount Funded Retirement Reserve Fund $ 95,825,770 $ 95,825,770 Members' Deposit Fund 17,182,365 17,182,365 Pension Reserve Fund N/A 36,571,815 17

24 Employees' Retirement System Notes to Financial Statements Note 6 - Pension Plan Reserves (Continued) Members' Deposit Fund Pension Reserve Fund Retirement Reserve Fund Balance - July 1, 2016 $ 16,799,652 $ 42,166,770 $ 78,974,385 Additions: Employee contributions 914, Employer contributions - 4,710,485 - Total investment income 802,459 5,596,014 10,480,808 Deductions: Contributions returned to employees (38,375) - - Pension and insurance premium payments - - (10,826,626) Transfers: Recommended by actuary - (15,901,454) 15,901,454 Pensions awarded (1,295,749) - 1,295,749 Balance - $ 17,182,365 $ 36,571,815 $ 95,825,770 Note 7 - Net Pension Liability of the Employers The components of the net pension liability of the City and 47th District Court (the "Court") at were as follows: Total pension liability $ 188,838,977 Plan fiduciary net position (149,579,950) Employers' net pension liability $ 39,259,027 Plan fiduciary net position as a percentage of the total pension liability 79.2 % The net pension liability of $39,259,027 has been allocated separately to the City and to the 47th District Court. A special funding situation does not exist in accordance with Governmental Accounting Standards Board Statement No. 68 and therefore, the City has not recorded the Court's proportionate share of the net pension liability. The City's proportionate share of the net pension liability is $37,396,907 at. 18

25 Employees' Retirement System Notes to Financial Statements Note 7 - Net Pension Liability of the Employers (Continued) Actuarial Assumptions - The total pension liability was determined by an actuarial valuation as of June 30, 2016, which used updated procedures to roll forward the estimated liability to. The valuation used the following actuarial assumptions, applied to all periods included in the measurement: Inflation 2.5 % Salary increases % Average, including inflation Investment rate of return 7.5 % Net of pension plan investment expense, including inflation During the year, the City of Farmington Hills Employees' Retirement System Board of Trustees approved the setting of the investment rate of return assumption at 7.4 percent. If the approved 7.4 percent investment rate of return assumption had been used at the measurement date of, the total pension liability would have increased in the amount of $1,964,485. Mortality rates were based on the 2000 Mortality Combined Healthy Tables, projected 20 years with U.S. Projection Scale BB. Discount Rate - The discount rate used to measure the total pension liability was 7.5 percent. The projection of cash flows used to determine the discount rate assumed that employee contributions will be made at the current contribution rate and that city contributions will be made at rates equal to the difference between actuarially determined contribution rates and the employee rate. Projected Cash Flows Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 19

26 Employees' Retirement System Notes to Financial Statements Note 7 - Net Pension Liability of the Employers (Continued) The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. Best estimates of arithmetic real rates of return as of for each major asset class included in the pension plan's target asset allocation, as disclosed in the investment note, are summarized in the following table. Asset Class Long-term Expected Real Rate of Return Global equity 6.90 % Global fixed income 2.80 Hedge funds 3.50 Private equity 9.60 Real estate 4.50 Infrastructure 7.00 Gold 3.30 Cash or cash equivalents 1.40 Sensitivity of the Net Pension Liability to Changes in the Discount Rate - The following presents the net pension liability of the City and the 47th District Court, calculated using the discount rate of 7.5 percent, as well as what the employers' net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (6.5 percent) or 1 percentage point higher (8.5 percent) than the current rate: 1% Decrease (6.5%) Current Discount Rate (7.5%) 1% Increase (8.5%) Net pension liability of the employers $ 61,324,752 $ 39,259,027 $ 20,551,160 Note 8 - Risk Management The Plan s exposure to noninvestment risk of loss is minimal; exposure is limited primarily to errors and omissions. The Plan manages risk by participating with the City of Farmington Hills, Michigan in the Michigan Municipal Risk Management Authority risk pool. The pension board has a $3 million fiduciary liability insurance policy with a $25,000 deductible that covers all pension board members. 20

27 Required Supplemental Information 21

28 Employees' Retirement System Required Supplemental Information Schedule of Investment Returns Last Ten Fiscal Years Annual money-weighted rate of return, net of investment expense 12.3 % (1.8)% (0.4)% 16.5 % 10.7 % (1.7)% 20.7 % 15.5 % (15.3)% (1.9)% 22

29 Employees' Retirement System Required Supplemental Information Schedule of Changes in the City's Net Pension Liability and Related Ratios Last Ten Fiscal Years 2017** * 2012* 2011* 2010* 2009* 2008* Total Pension Liability Service cost $ 3,373,013 $ 3,389,831 $ 3,345,050 $ 3,412,039 $ - $ - $ - $ - $ - $ - Interest 13,507,444 12,897,603 12,530,511 12,050, Changes in benefit terms - 122, Differences between expected and actual experience (1,021,725) (677,524) (1,437,308) Changes in assumptions - (2,974,074) Benefit payments, including refunds (10,865,001) (10,148,144) (8,984,021) (9,085,912) Net Change in Total Pension Liability 4,993,731 2,610,624 5,454,232 6,377, Total Pension Liability - Beginning of year 183,845, ,347, ,892, ,515, Total Pension Liability - End of year $ 188,838,977 $ 177,957,820 $175,347,196 $169,892,964 $ - $ - $ - $ - $ - $ - Plan Fiduciary Net Position Contributions - Employer $ 4,710,485 $ 4,710,931 $ 4,882,377 $ 4,557,473 $ - $ - $ - $ - $ - $ - Contributions - Member 914, , , , Net investment income 16,113,238 (3,173,808) (1,418,620) 22,334, Administrative expenses (289,700) (284,222) (409,172) (304,659) Benefit payments, including refunds (10,865,001) (10,148,142) (8,984,023) (9,085,912) Other 1,055, ,977 6, Net Change in Plan Fiduciary Net Position 11,639,143 (7,345,609) (5,026,638) 18,393, Plan Fiduciary Net Position - Beginning of year 137,940, ,286, ,313, ,919, Plan Fiduciary Net Position - End of year $ 149,579,950 $ 137,940,807 $145,286,416 $150,313,054 $ - $ - $ - $ - $ - $ - Plan's Net Pension Liability - Ending $ 39,259,027 $ 40,017,013 $ 30,060,780 $ 19,579,910 $ - $ - $ - $ - $ - $ - Plan Fiduciary Net Position as a Percentage of Total Pension Liability % % % % - % - % - % - % - % - % Covered Employee Payroll $ 19,980,215 $ 19,857,814 $ 20,213,039 $ 21,343,777 $ - $ - $ - $ - $ - $ - Plan's Net Pension Liability as a Percentage of Covered Employee Payroll % % % 91.7 % - % - % - % - % - % - % * GASB Statement No. 67 was implemented for FYE June 30, 2014 and does not require retroactive implementation. Data will be added as information is available until 10 years of such information is available. ** The June 30, 2016 total pension liability was restated in the actuarial valuation to include the retiree healthcare opt-out stipend payments 23

30 Employees' Retirement System Required Supplemental Information Schedule of Employers' Contributions Last Ten Fiscal Years Actuarially determined contribution $ 4,710,485 $ 4,710,931 $ 4,882,377 $ 4,557,473 $ 4,302,129 $ 4,482,745 $ 4,008,049 $ 3,710,289 $ 3,664,637 $ 3,775,618 Contributions in relation to the actuarially determined contribution 4,710,485 4,710,931 4,882,377 4,557,473 4,302,129 4,482,745 4,008,049 3,710,289 3,664,637 3,775,618 Contribution deficiency $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Covered payroll $ 19,980,215 $ 19,857,814 $ 20,213,039 $ 21,343,777 $ 19,898,614 $ 20,415,113 $ 21,236,510 $ 21,749,242 $ 24,904,782 $ 24,662,884 Contributions as a percentage of covered payroll 23.6 % 23.7 % 24.2 % 21.4 % 21.6 % 22.0 % 18.9 % 17.1 % 14.7 % 15.3 % Notes to Schedule of Employers' Contributions Actuarial valuation information relative to the determination of contributions: Valuation date Actuarially determined contribution rates are calculated as of June 30 each year, which is 12 months prior to the beginning of the fiscal year in which contributions are reported. Methods and assumptions used to determine contribution rates: Actuarial cost method Entry age normal Amortization method Level percent of payroll (level dollar method for general division) Remaining amortization period Police and fire: 28 years (closed) Court employees: 15 years (closed) Asset valuation method Inflation Salary increases Investment rate of return Retirement age Mortality Other information General employees: 12 years (closed) Five-year smoothed market 2.5 percent 4.5 to 7.5 percent (general and court), 4.5 percent to 23.5 percent (police), 4.5 percent to 20.5 percent (fire) 7.5 percent - Net of investment expenses Experience-based table of rates that are specific to the type of eligibility condition 2000 Mortality Combined Healthy Tables, projected 20 years with U.S. Projection Scale BB None 24